TIME russia

Putin Has Already Lost

Russian President Vladimir Putin speaks during a meeting on economic issues at the Bocharov Ruchei residence in Sochi on March 12, 2014.
Russian President Vladimir Putin speaks during a meeting on economic issues at the Bocharov Ruchei residence in Sochi on March 12, 2014. Michael Klimentyev—AFP/Getty Images

Russia’s economy can’t sustain its leader’s ambitions

With the tumult in Ukraine continuing, there’s been a lot of talk about the U.S.’s major lever in the fight against Vladimir Putin’s Russia: petropolitics. Usually, it’s emerging powers–Russia, Iran and Nigeria–that use the spoils of oil and gas to bolster their influence. Consider that Germany, the world’s fourth largest economy, depends on Russia for about 40% of its energy, and Western Europe as a whole gets a third from it. It’s not hard to see why Europe hasn’t been eager to go along with trade sanctions against Russia in the past (or now). No European leader wants to risk an energy shortfall or peak prices in the middle of a cold winter.

The question today is whether the U.S., which is becoming a major shale-oil and gas producer in its own right, can do anything to help Europe loosen the Russian energy noose. The Obama Administration believes it can and is pushing to accelerate the process of getting American liquefied natural gas (LNG) on line and ready for export. Transportable LNG is the fruit of the fracking boom. Pundits and politicians like House Speaker John Boehner are touting the idea that American energy could make a big difference in Europe, in the struggle with Russia and ultimately in many global conflicts. “The ability to turn the tables and put the Russian leader in check,” Boehner wrote in a Wall Street Journal op-ed, “lies right beneath our feet.”

That view is overly optimistic. J. Robinson West, founder of PFC Energy and a senior adviser at the Center for Strategic and International Studies, agrees. “People have the idea that it’s easy to use energy as a weapon, but it’s not,” he says. “It’s extremely complicated.” For starters, liquefied natural gas remains limited in scope. Although gas is relatively easy to transport via pipeline, you can’t ship it by sea if it’s not properly stabilized. The first LNG export hub to clear hurdles set by the U.S. Federal Energy Regulatory Commission is Cheniere Energy’s Sabine Pass project, on the border of Texas and Louisiana, but it won’t come on line until late 2015 at the very earliest. The next three ports on the waitlist haven’t even been greenlighted. When construction will begin is anybody’s guess.

America’s homegrown shale-oil and gas production is still minuscule. While the U.S. Energy Department is predicting that shale-oil production will climb to about 10 million barrels per day by 2017, right now it’s about 3 million. Given that the U.S. consumes about 37 million barrels per day of fossil fuel, it’s not as if the nation is about to become a major energy exporter overnight.

And when U.S. production reaches levels high enough for potential export, there will likely be a heated debate about whether it should go abroad. America’s budding manufacturing renaissance in recent years has been predicated on U.S. firms’ (particularly energy-intensive chemical and heavy-machinery manufacturers) having easier access to cheap shale oil and gas. Experts like Daniel Yergin, author of The Prize, a Pulitzer-winning history of the oil business, are eager to see infrastructure spending on new pipelines to take Western shale oil and gas to Rust Belt refineries, improving their profitability. The 2016 U.S. elections are on the horizon, and the state of the economic recovery, which remains weak, is still the top political issue. In that environment, it’s hard to see how sending a few million barrels per day of gas to Europe could compete with the larger goal of U.S. job creation and American competitiveness.

The U.S. can’t save Europe when it comes to energy. And it can’t impose truly effective sanctions without Europe’s cooperation. Thing is, it probably won’t have to. Putin’s petrostate will eventually implode all by itself.

Even before the Ukrainian crisis began, Russia was headed toward a major decline. Despite oil prices being more than $100 a barrel, its economy will be lucky to grow at a rate of 1% this year–about one-third of the U.S. rate. The fact that the American economy is growing faster than not only Russia’s but also Brazil’s and those of other emerging-market nations is truly amazing. A decade ago, the BRIC countries were supposed to be the world’s economic salvation. Since then, they’ve become complacent, and their growth has been cut in half. Some, like China, are brewing up epic debt crises. Others, like Russia and Turkey, are ruled by autocratic strongmen trying to grapple with tumbling markets and foreign-capital flight on a massive scale.

The world, in other words, has turned upside down economically. Russia’s pain will continue to be the U.S. markets’ gain, as investors seek safety in U.S. Treasury bills and blue-chip stocks. In economic terms, the war over Ukraine has already been won–and not by Putin.

TIME

The Real Debt Crisis We Aren’t Talking About

San Jose Is Wealthiest City In Nation
San Jose, California Justin Sullivan—Getty Images

I spent the day in San Jose, California yesterday, reporting on the city’s effort’s to come to grips with what Mayor Chuck Reed calls a “crisis” in the pension system that threatens the future of the town. At first sight, it seems strange that a town full of techies and which is home to companies like eBay and Adobe can’t afford to fill potholes or keep local libraries open full-time. But gold-plated city pensions are, according to the Mayor, the chief reason that this is the case. And the cut backs that are being made to afford them may actually result in greater economic bifurcation in the city, and higher tax rates for poor and middle class taxpayers, many of whom have little retirement savings themselves.

I’ll be blogging more about what’s happening on the ground in San Jose later in the week. But first, a bit of background on the real debt crisis in this country, the one that we haven’t talked about seriously yet, let alone come to terms with—the retirement crisis. The key stat you need to know: the median household retirement savings for all workers between the ages of 55 to 64 is $120,000. That works out to about $625 a month. A full one-third of the workforce aged 45 to 54 has saved nothing at all for retirement. At a time when social security benefits are being paired back, public pensions are being restructured en mass, and housing growth is flat (only the top 10 markets in the country are predicted to have any significant price increases in the next 15 years), this is a looming iceberg of a crisis.

Declining workforce participation numbers show how quickly the boomers are moving out of work, either by choice or force, and into a retirement in which more than half of them won’t match even 70 percent of their previous income levels. That has implications for everything from over U.S. consumption and GDP growth, to politics in the 2014 Congressional elections and the 2016 Presidential elections, in which boomers will increasingly face off against everyone else for a shrinking piece of the federal pie. (They will likely continue to fight necessary entitlement reform in large part because social security is the only thing most will have for retirement.)

The crisis can be split into two parts. First, the public pensions debacle, which involves only 10 percent of the American workforce, but has economic implications far beyond that, as pension entitlements tank entire cities, like Detroit. Second, there’s the private crisis—only 55 percent of private sector workers in America have access to any kind of formal savings plan, like a 401K. With large companies paring back benefits, and most job creation coming from small- and middle-sized companies that can’t or won’t offer such benefits, the stats will likely get worse in the next few years. California is in many ways ground zero for both the public and private portions of the crisis. Aside from Detroit, the largest public pension fights and biggest municipal bankruptcies have been in places like Stockton, Vallejo, and San Bernardino. Meanwhile, the state also has more retirees, young people without benefits, poor people, immigrants and small- or middle- sized companies than most states, meaning that it hits all the red buttons in terms of citizens who are most at risk in terms of retirement security.

Yet it’s also at the center of the most innovative new proposals about how to fix the crisis. San Jose Mayor Reed is pushing pension reform that would keep benefits that workers have earned but allow changes to benefits earned in the future, and force local politicians to raise a red flag if public pensions are at risk of being under-funded. (The failure to do that, and take responsibility early on, is a key reason many cities have gone bankrupt.)

Meanwhile, in the private sphere, Governor Jerry Brown signed the California Secure Choice Retirement Savings Program, developed by state senator Kevin de Leon, into law last year. This plan, which would be a state-run defined benefit program guaranteeing a minimum level of income for any private sector worker, will require everyone to put 3 percent of their income into a super conservative indexed fund. The idea would be to create a kind of substitute or add-on for social security. It’s getting huge push back from the financial industry (which doesn’t want to lose fees) as well as many conservative state politicians. But it’s already being copied in New York and Maryland. Illinois, Oregon, Washington, Connecticut and even Arizona are taking consultation on similar plans.

If successful, it would mark a sea change in the way we’ve thought about retirement, which everyone admits isn’t working. It would also mean a move back to a new kind of state-run program, very different from the huge entitlement systems of the past, but also different from the do-it-yourself, market knows best ethos of the 401K society that has left most people bereft. I will visit a variety of communities in California this week that reflect different aspects of the retirement crisis – look out for my blogs from San Jose, Stockton and L.A.

TIME

What Global Petropolitics Really Mean for You

This week on WNYC’s Money Talking, I chatted about the news story that interests me the most at the moment—the economic backdrop for the escalating political crisis in Ukraine and what the crisis means for the economies of Europe, Russia, Ukraine and the United States. Listen below.

TIME

America Can’t Fix Europe’s Russian Energy Problem

Gasoline pump at gas station
Kyoungil Jeon—Getty Images

With the tumult in the Ukraine continuing, there’s been a lot of talk over the last week about how the U.S. may have a major lever in the fight against Putin’s Russia—petro-politics. Usually, it’s emerging markets like Russia that use oil and gas as a political tool. And indeed, the fact that countries like Germany get about a third of their energy from Russia is a key reason that Europe hasn’t been as willing to go along with trade sanctions in the past. Sure, the Russians need Europe as much as Europe needs them (if not more)—about 70 percent of Russia’s export revenues come from oil and gas, much of it sold to the Continent. But no European leader wants to risk an energy shortfall or peak prices in the middle of winter.

The question is whether the U.S., which is becoming a major shale oil and gas producer in its own right, can actually do anything to help Europe loosen the Russian energy noose. The Obama administration believes it can, and is pushing to accelerate the process of getting American liquid natural gas (LNG) online and ready for export. A front-page story in the New York Times hinted that American energy could make a big difference in Europe, and in the conflict with Russia.

I think that view is overly optimistic. Here are three reasons why:

  1. LNG is, and remains, a very localized market. The first LNG export port to clear the Federal Energy Regulatory Commission (FERC) hurdle is Cheniere Energy’s Sabine Pass port, on the Sabine Pass River on the border between Texas and Louisiana. But it won’t come online until late 2015 at the very earliest—possibly even 2016. The next three ports on the wait list haven’t even been green lighted.
  2. The U.S. isn’t producing a lot of shale oil and gas yet, anyway. While the U.S. energy department is predicting that shale oil production will climb to about 10 million barrels per day by 2017, right now, it’s about 3 million bpd. Given that America itself consumes over 90 million bpd of fossil fuel, it’s not as if we are about to become a major energy exporter, even as our own production rises.
  3. We need cheap energy at home if we are going to fuel the manufacturing renaissance. We’ve heard a lot about the growth of manufacturing in America over the last few years. But a big part of that story is easier access to cheap shale oil and gas here at home. American business wants to build pipelines to take Western shale oil and gas to Rust Belt factories to improve competitiveness. If we start to see much of it going to Europe, we may have a political and/or trade fight on our hands.

The bottom line: American can’t save Europe when it comes to energy. The Continent needs to wean itself off Russian gas, no question. But it’s more likely to do that by rethinking its recent reductions in nuclear energy and overly generous subsidies for green energy (which have pushed up prices), as well as by looking abroad to places like West Africa for new energy sources than by counting on the US for a quick energy fix. While America’s push to speed up the LNG approval process may send a useful political message to Putin, it won’t change the European energy dynamic on the ground anytime soon.

TIME

How To Fix the Student Loan Bubble—and Banking, Too

money
Getty Images

New types of lending are coming of age

The US banking structure is screwed up in many ways, but policy-wise, nothing is more destructive than FDIC insurance for banks that do investment banking and trading as well as commercial lending. The fact that we haven’t split up plain vanilla lending from riskier, more leveraged operations has all sorts of perverse effects, the best known being the too big to fail problem.

But as I’ve been looking into the $1 trillion student loan bubble, I’ve found another perverse effect of our misaligned banking system. One of the reasons that the student loan bubble is so big and loans are so onerous is that any bank that is insured by the FDIC can’t actually price risk in the market effectively. There are base student loan rates, all of which are set by the government. Rules about how depository institutions backed by taxpayer dollars can make loans create a situation in which it is very difficult for such institutions to come come in and give, say, a Stanford MBA graduate that has incredibly high earning potential a better rate than a English major at a lesser institution. (Sorry, Edith Wharton fans.)

Now, on the one hand, this policy has its roots in a fair-minded—it helps prevent discrimination by geography or a host of other factors. But on the other hand, it leads to a system in which we have a one size fits all approach to lending. It doesn’t matter whether the default rate at school A is 1 %, and the default rate at school B is 10 %, students must pay the same rates. The difficulty in effectively pricing risk is a key reason that the government, not the private sector, represents 93 % of lending in the student loan market.

But these inefficiencies have created an interesting opening in the market, from which a new financial model is emerging, one that uses peer to peer lending in a way that evokes the community banking models of old. One of the companies at the forefront of it is SoFi, started a former head of prop trading at Wells Fargo, Mike Cagney. Working in the Bay Area, Cagney wondered why extremely marketable Stanford grads with no money but extremely good future earnings prospects had to pay such a high rate to borrow. (After all, most of them are extremely unlikely to default.) He looked into starting a bank to loan to such customers, but ran into the issues I’ve described above.

So, what he did was go to Stanford grads, people who would actually know the trajectory of Stanford students, and ask them to underwrite loans to students at preferred rates, thereby raising money without having to become an FDIC insured bank. The alumni who have an affinity with the people to whom they are lending absorb the loan risk. “They know their customers, in effect, and have an emotional tie with them,” says Cagney. It’s kind of like a modern version of the “It’s A Wonderful Life” community savings and loan model, where you walk across the street to see the people you are lending to. (“The money’s in Joe’s startup. And in Kennedy’s medical practice. And a hundred others.”)

The project, which has been a success in California, started rolling out nationally in 2012. In each market, Cagney would approach alumnae at various colleges (University of Michigan, Penn State, etc) and get them to make initial investments. He has since been able to raise independent financing. SoFi now has over $400 million of loans outstanding with 4,500 borrowers, and will likely do another $1 billion this year, adding another 10,000 borrowers.

This idea is just one of many alternative lending models that are coming of age. SoFi itself is entering the mortgage market, which is ripe for restructuring. More importantly, it shows how badly our overall financial system needs restructuring. Certainly, there are social questions that the SoFi model raises—should we as a society allow students who graduate from better school and want to work in richer fields to get preferred loan rates? Cagney would argue yes, because he believes that a better market pricing of loans would force universities to price degrees differently, and acknowledge that while an Ivy League degree in a STEM or business oriented field might be worth $50,000 to $60,000 a year, many others are not. If that led to a re-pricing of education itself, it could help deflate the loan bubble and make school more affordable. But we’d have to make sure that it didn’t also result in the degradation of liberal arts education, for example, or unfairly penalize kids who simply can’t afford to go to top schools. One solution might be for the government loan system to play a key role there, or for peer-to-peer lenders to package risk in such a way that some of the benefit of premium loans flows to students from less sought after schools in the form of more liquidity and availability of finance.

What’s clear is that it’s not just student loans, but all sorts of risks that are crudely and wrongly priced due to the way that the banking industry is structured. The result means higher capital charges for all of us, but also potentially smaller profits for banks. (Many people, like FDIC vice chair Thomas Hoenig, believe that banks would be far more profitable than they are now if they were split up along business lines rather than allowed to remain conglomerates.) I think that peer-to-peer lending and other alternative models that are closer to the customer than the traditional banking model are will slowly but surely displace Old Finance. After all, who is better at assessing the risk of a credit—a bank, or someone from the borrower’s own community?

TIME global economy

Russia, the Ukraine, and the Markets: Broken BRICs

Russia's President Vladimir Putin attends the opening ceremony of the Russian Pilgrims' House at the Jordanian side of the Jordan River
Ali Jarekji—Reuters

For a couple of years now, one of my very smartest sources, Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, has been saying that the emerging market story was over. Coming from someone who makes their money trading those markets, that’s quite a statement. But the last few days of market turmoil and today’s tanking of Russian stocks makes me think once again how right he is. Even before the crisis in the Ukraine, the Russian economy grew at only 1.5 percent last year, and it will be lucky to grow this year at even one percent, despite oil prices being over $100 a barrel. (Some 70 percent of Russia’s export revenues come from oil and gas.) That says a lot about how broken this particular petro state is.

But it’s not the only emerging market in trouble. For the last couple of years, Russia, Brazil, South Africa and many other emerging markets have not only been growing more slowly, but they aren’t even doing as well as the U.S. That is quite a reversal given that countries that are “emerging” are supposed to grow faster than those that have already arrived. A big part of the problem is that the underlying growth models of these nations are simply broken. As Sharma pointed out in an FT op-ed this week, when Vladimir Putin took power in Russia a decade ago, he was part of a “populist turned pragmatist” trio that included other emerging market leaders like Luiz Inacio Lula da Silva in Brazil, and Recep Tayyip Erdogan in Turkey. These guys were supposed to be reformers, and for a time, their economies seemed to prove that. Emerging market growth doubled to more than 8 percent by 2007.

That era is over. The reformers have become strong men, many of their economies stalled, with capital moving out. Emerging markets will be lucky to grow half that rate this year, and countries including Turkey, Brazil, Thailand and even China are not only slowing sharply, but brewing up debt bubbles that could result in an emerging market replay of the 2008 subprime crisis. “Just like every hyped up theme of one decade, from Japan in the 1980s, to Tech in the 1990s, the BRICs theme of the last decade is fading fast,” says Sharma. “As the BRIC stock markets have lost at least half their value in dollar terms this decade as they have become complacent following their liquidity driven growth spurt.”

So where does the money go from here? Back to the West, or at least, to the U.S. As I wrote yesterday, U.S. blue chips and bonds will continue to look like pretty good bets in an increasingly shaky world. Although I must say that I was spooked by PIMCO chief Bill Gross’ monthly investment outlook, released today, in which he quotes William Butler Yeats’ dark poem, “The Second Coming.” If markets don’t buy into the Fed’s promises of low rates and a slow and steady retreat from quantitative easing, the center of U.S. markets, which have been skewed in recent years by the central bank’s $4 trillion money dump, may indeed not hold.

TIME global economy

What Ukraine Means for the Markets

Wall Street Premarket
Richard Drew—AP

Global markets have been falling on worries over conflict in the Ukraine. Is this the end of the multi-year bull market that has taken stocks to record highs recently? In a word no, but there are some important economic impacts that will be lasting; below, my top three market takeaways:

  1. Oil prices will stay higher than they should be based on demand. There’s been a lot of talk in recent months about the impact of the shale oil and gas revolution in the U.S. We’ve got so much more energy coming online at home, surely it will mean lower prices, especially when you consider that big emerging markets like China are slowing and buying less oil, right? Wrong.The lesson from the Ukraine is that geopolitical risk matters a lot in oil markets – prices were already over $100 thanks to worries over conflict in Syria and general turmoil in the Mid-east. They are now being pushed up further as the situation in the Crimea heats up, even though other commodities have been falling because of slow demand. The world has enough energy – but just the perception that some of it may be cut off is enough to keep prices higher than they should be.
  2. High oil and gas prices will allow Russia to play petro-politics with Europe, making effective sanctions difficult to implement. The U.S. isn’t dependent on Russian gas, but Europe gets about 40 percent of its supply from Russia, much of it via pipelines that flow through the Ukraine. Germany and the Netherlands in particular will be affected, in part because of bad energy policies that have already pushed up prices in those markets.German banks also have large investments in Russia, so Europe may not be able to play tough on sanctions. Why can’t the U.S. just export some of its gas to Europe if Russia plays hardball? Because unlike oil, gas is a localized market – and the first American LNG export terminal won’t be completed until next year.
  3. U.S. blue chips will likely rebound, but mainly because of the “prettiest house on an ugly block” phenomenon. I’ve been worried about frothy U.S. markets for some time .(U.S. large cap stocks are trading at 17 times earnings, close to the multi-year highs of last year.) Technology in particular feels like it’s in bubble territory ($19 billion for WhatsApp? What?).But look around – where else are you going to put your money if not in high quality U.S. stocks? Even before the trouble in the Ukraine, emerging markets were doing badly – Russia and Turkey are tanking, India and Brazil are stalling and China is brewing up a real estate bubble that could make pre-2008 Florida and Arizona look like small potatoes. Europe is trying to stave off deflation, double-digit youth unemployment and possibly now higher energy prices thanks to the trouble in the Ukraine. Meanwhile, the U.S. will grow faster than the world economy as a whole this year. Valuations may be inflated, but it’s only after this bout of geopolitical conflict is over that we will we see a correction that really reflects whether the Fed inflated bull run has come to an end.
TIME Pension

Can Pensions Be Fixed?

Getty Images

This is a topic I’ve been obsessed about in recent days. From San Jose to Detroit, Illinois to Rhode Island, cities and states are struggling with the issue. In New Jersey, Governor Chris Christie is proposing a new $34.4 billion budget that includes more than $2 billion in pension payments, the largest outlay yet to shore up the crisis in pensions for public workers. Can it work? To find out, listen to the New York Times’ Joe Nocera and I discuss the topic on the latest edition of WNYC’s Money Talking, here:

TIME Taxes

What To Like (and Dislike) in the Camp Tax Proposal

Alamy

There are things to like and things not to like about Republican congressman Dave Camp’s new 979-page tax plan. But here’s what I like most about it – it starts a serious conversation about tax reform that we definitively need to have, and provides a host of ideas that deserve serious discussion.

First, the points that I’m in favor of:

  1. A cut in the mortgage interest deduction from $1 million to $500,000. It will make a lot of upper middle class people angry (and it will hurt people who, like me, live in big expensive cities that require enormous mortgages to procure enough space for our families). But that’s ok — it’s still the right thing to do. As Nobel laureate Robert Shiller and other housing experts have explained, incentivizing people to pour the majority of their income into giant mortgages, which discourages investment diversification and encourages debt, isn’t a great use of our country’s savings. Ideally, the mortgage deduction would be structured in such a way as to take into account the nuances of various city real estate markets. But it’s tough to argue that we should be encouraging people to take out $1 million mortgages across the board.
  2. An across the board cut in the corporate tax rate from 35 to 25 % — but only if many loopholes are closed, too. It’s true that U.S. taxes are high on an international basis – and you can make an argument that if they were lower, it would encourage more investment here at home. But it’s an argument that only holds if the companies end up paying the 25 % (currently, many corporates pay under 20 % even though the official rate is 35 %, thanks to the many corporate loopholes created by industry lobbying). I very much like the idea of not subsidizing rich industries like oil and gas or finance with special tax cuts – we should also make it a lot tougher for all industries to keep money offshore in overseas bank accounts.
  3. Raising more money from business versus individuals. As an initial Brookings analysis of the plan pointed out, despite its pro-business aura, it would actually cut individual income taxes and raise revenue collected from business – which is appropriate at a time when the corporate share of the economic pie has never been greater or labor’s lower.

Here’s what I don’t like so much:

  1. The earned income tax credit gets reduced. The EITC is one of the most effective ways of putting money in people’s pockets – we should be thinking of ways to increase, not decrease, it.
  2. The net effect of the changes appears to be neutral for low-income households. That’s a pity in an age when so many people are working two or three $15 an hour jobs to try and make a living wage. Tax policy should help more at a time when wages are still stagnant, and don’t look likely to go up anytime soon.
  3. The “tougher” tax regime for private equity and hedge funds isn’t tough enough. Capital gains and dividend taxes would increase from 23.8 % to 24.8 %. Under the Camp plan, capital gains and dividends would be taxed at the ordinary rate, but with a 40 % exclusion (which takes you to 21 %, to which you add the 3.8 % Affordable Care Act surtax). While I am glad that a Republican is finally putting the idea of higher taxes on investment income up for grabs, I still have to ask – why does making money from money require a special deduction? If anything, investment income should be taxed at a higher rate than income earned by labor. This does not get us to where we need to be to bridge the gap between Warren Buffett and his secretary.
TIME real estate

A Robust Housing Recovery? Not So Fast

Hal Bergman—Getty Images

That’s a question I’m asking after reading some new housing data and real estate market studies out this week. The national numbers make it seem like we’re having a pretty good year for housing, which is one of the keys to overall economic growth in this country. (As Warren Buffett once told me, if you fix housing, you can fix the American economy.) And house prices did go up by a healthy 11.4 % in 2013, with the latest Case Shiller data showing an 8 –year high. So far, so good.

But two things concern me about the market right now. One, the new numbers are trailing indicators—house prices reflect where we have been, not where we are going. The second half of 2013 was weaker than the first, and the last few months of home sales in particular have been slack. That information will take about six months to trickle through into the official data, which is one of the reasons that the smart folks at Capital Economics believe that “2014 will mark a significant slow down in the pace of house price appreciation.” Despite the Fed’s “forward guidance” about keeping interest rates low for years to come, it will be interesting to see if the market buys it. The Fed can only control base rates, not market rates for mortgages, and if they start creeping back up, we may see a significant pull back in refinancing and mortgage applications as we did last summer. Less demand on that front would eventually mean lower prices.

But as in so many areas of the economy, the state of the market will depend very much on where you live. There’s a big, deep new study just out from the Conference Board’s Demand Institute, looking at the state of the housing recovery in 2200 cities around the country. That study finds that there’s a large and growing bifurcation in housing in America. The top 10 percent of cities in the country (ranked by the aggregate value of their owner occupied homes) now hold 52 percent of all housing wealth. Basically, we’ve got a 1 percent/99 percent phenomenon happening in housing, which has massive wealth implications for middle class Americans, who still hold the majority of their wealth in their homes.

For starters, if you are counting on using home equity as part of your retirement plan, you’d better hope you live in one of those top ten market; price increases will be three times greater in the strongest markets than in the weakest ones. Over the next five years, while national prices are estimated to grow only about 2 % a year between 2015 and 2018, some of the top markets are predicted to boom, while about 50 % of all housing markets are still trying claw their way back from the housing crash and Great Recession, with many still underwater.

Perhaps most interesting is the fact that while some markets simply have a natural home court geographic advantage (think prime East and West coast real estate), you can also craft housing policy that creates a more vibrant market, as cities like Hoboken, NJ have done. If housing continues like this, it will have big long-term implications for retirement and consumer spending. (Every dollar of new housing wealth has a much bigger impact on spending than wealth created in the stock market does.) Reason enough to bring bifurcation into the current discussions in Washington around housing reform, and creating a market in which all Americans, not just the richest, can get a 30-year mortgage at a decent rate.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser